With InvITs now recognised as borrowers under the SARFAESI Act, lenders to these trusts shall have adequate statutory enforcement options, the absence of which was a constraint for bankers to lend directly at the trust level earlier.
By Shubham Jain
Popularly known as InvITs, Infrastructure Investment Trusts have gained significant momentum over the last two years. The Securities and Exchange Board of India (SEBI) came out with the initial set of guidelines for such structures in July 2014 and has been constantly improvising them, based on the feedback from the stakeholders as well as experience from the developed markets. This has made InvITs more amenable to both lenders and investors.
Till now, assets worth Rs 1.38 trillion have been monetised through eight such structures, of which only three (~ Rs 387-bn assets) are publicly listed, which also indicates the complexity involved with such issuances, thus making them relatively more suitable for the institutional investor. The road sector has been the leading contributor to InvITs thus far, followed closely by telecom towers and transmission lines.
In terms of debt issuances, the total amount raised by InvITs is around Rs 550 bn, resulting in a loan-to-value (LTV) of roughly around 40%, which is much lower than the leverage generally seen in infrastructure projects. The low LTVs resulting in strong debt coverage indicators, coupled with structural features such as cash flow pooling, asset diversification, availability of strong liquidity buffers, lends significant support to the credit profile of InvITs, also reflected in their high credit ratings. Further, the regulatory provisions of limiting leverage levels, mandatory cash flow distribution and, most importantly, a cap on under-construction projects in the portfolio, add to the stability and predictability of cash flows.
With InvITs now recognised as borrowers under the SARFAESI Act, lenders to these trusts shall have adequate statutory enforcement options, the absence of which was a constraint for bankers to lend directly at the trust level earlier. Further, the IRDAI has recently allowed insurers to invest in debt instruments of InvITs rated ‘AA’ and above.
InvITs had their share of initial struggle though. This is evident from the very limited participation in the earlier debt issuances, from only a handful of mutual funds (MFs). The paucity of demand also resulted in high coupon/interest rates to start with. The spread between coupon rates for InvITs and similar rated corporate bonds used to be around 125-150 bps, which has come down to a much more respectable level of 30-50 bps for recent transactions.
An InvIT is also exposed to risks typical of any operational infrastructure asset. Some of the prominent ones include counterparty risk, dispute with the authorities, assumption on long-term growth trends, competition from new roads/other modes, unanticipated negotiations, political risk, and ability to operate at optimum levels for long periods of time. An additional risk is the requirement to regularly add assets to the portfolio, which may result in considerable changes in the business risk profile. For example, an InvIT comprising power transmission lines adding generation assets. Further, the acquisition value and leverage undertaken for such acquisitions can have a material impact on the financial risk profile.
Thus, a robust governance structure and high transparency levels will help in taking InvITs to the next level of market acceptance and allowing them to become the ideal model of asset monetisation in India. This would also be important to support the large number of InvITs (including many from state entities) in the pipeline, with assets worth over Rs 2 trillion, which are expected to be monetised within the next one year.
In the long run, all infrastructure assets with three to five years of operating track record across segments like roads, gas pipeline, digital fibre, power transmission and renewables are ideal candidates for monetisation through this platform.
The writer is Group Head & Senior Vice President, Corporate Ratings, ICRA